What is Cash Reserve Ratio

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Cash Reserve Ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes as financial investment. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault or with a central bank.

For example, if the reserve ratio in the U.S. is determined by the Fed to be 11%, this means all banks must have 11% of their depositors money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $110 million on reserve.Cash reserve Ratio (CRR) in India is the amount of funds that the banks have to keep with RBI. RBI will pay some interest on this money. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method to drain out the excessive money from the banks.

Raising the CRR is depends on the economy changes. As an investor, you could have profit or loss to your financial investment from this action. Stock market react by coming down when there is an increase in interest rate. And behave just opposite when cutting the CRR rate. In another hand, investors in the debt mutual funds will get benefited from the interest hike.

Who will affect badly from a CRR hike?

A borrower. When the interest rise due to a CRR hike, you will probably need to settle in for a lower loan amount given the EMI (Equated Monthly Installment). If you are an existing borrower, as long as the rate of interest on your loan is fixed, you are immune to any rise in interest rates. However, if you have a floating rate loan, then expect either the tenure of the loan or the EMI to jump soon.